Corporate Powers as Powers in Trust

Author(s): A. A. Berle, Jr.

Source: Harvard Law Review , May, 1931, Vol. 44, No. 7 (May, 1931), pp. 1049-1074
Published by: The Harvard Law Review Association

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 CORPORATE POWERS AS POWERS IN TRUST I049

CORPORATE POWERS AS POWERS IN TRUST *

IT is the thesis of this essay that all powers granted to a cor-

poration or to the management of a corporation, or to any group
within the corporation, whether derived from statute or charter or
both, are necessarily and at all times exercisable only for the
ratable benefit of all the shareholders as their interest appears.
That, in consequence, the use of the power is subject to equitable
limitation when the power has been exercised to the detriment of
such interest, however absolute the grant of power may be in
terms, and however correct the technical exercise of it may have
been. That many of the rules nominally regulating certain specific
uses of corporate powers are only outgrowths of this fundamental
equitable limitation and are consequently subject to be modified,
discarded, or strengthened, when necessary in order to achieve
such benefit and protect such interest; and that entirely new reme-
dies may be worked out in substitution for or supplemental to
existing remedies. And that, in every case, corporate action must
be twice tested: first, by the technical rules having to do with the
existence and proper exercise of the power; second, by equitable
rules somewhat analogous to those which apply in favor of a cestui
que trust to the trustee's exercise of wide powers granted to him
in the instrument making him a fiduciary.
The question is not academic. Its solution in the sense sug-
gested would give greater flexibility to corporate managements
in certain respects. It would permit them, when the action is
actually necessary or beneficial, to do things in the doing of which

* In preparing this article, the author is indebted for assistance and suggestions
to Messrs. Irving H. Dale, David H. Holzman, Wilbur Stammler, William J. Hoff,
Hugh R. Dowling, Abraham Marcus, Felix S. Cohen and David Orlikoff, all stu-
dents in the Columbia Law School.
The theory herein expressed was suggested by the writer in CASES AND MATE-
RIALS IN THE LAW OF CORPORATION FINANCE (I930) 62. The need of some syn-
thesis to harmonize the many apparently individual rules in the law of corporations
was likewise suggested by the writer in a paper, Organization of the Law of Corpo-
ration Fitance, read before the National Association of American Law Schools in
December, 1930, and in course of publication in the University of Tennessee Law
Review for May, 193I.

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 1050 HARVARD LAW REVIEW

they are now unduly hampered by technical rules. But where no

showing of benefit can be made, and where one group within the
corporation is to be sacrificed for the benefit of another, it would,
equally, circumscribe the use of certain apparently absolute
powers. In this latter aspect it is noteworthy that for years cor-
porate papers and general corporation laws have multiplied powers
and made them increasingly absolute; that charters have to an
increasing extent included immunity clauses and waivers of
" rights." It seems not to have occurred to draftsmen that,
through the very nature of the corporate entity, responsibility
goes with power.
Stated thus broadly, the thesis can be supported only by an
examination of the law governing every corporate power. As
space does not permit this, five of the principal apparently " ab
lute " corporate powers are here examined. Examination of all
other powers would, as far as the writer's studies have gone, lead
to the same result; the five chosen cover a fair cross-section of the
field.

A. The power to issue stock is at all times subject to the equitable

limitation that such issue must be so accomplished as to pro-
tect the ratable interest of existing and prospective share-
holders.

Among the rules developed are:

(i) The rule that the incoming shareholder must make a contribution
which in good conscience entitles him to participate to the extent al-
lowed by his shares.

The requirement that stock be paid for has two distinct bases
in American law. One line of thought required that stock be paid
for in order to supply a fund available for the protection of
creditors. With this ideology we are not at present concerned.
The second line was definitely based on the theory that every
shareholder had an interest in the payment made by every other
shareholder upon the issuance of his stock.' Mathematically

1 The cleanest statement of this rule is found in Luther v. Luther Co., ii8 Wis.
II2, I23, 94 N. W. 69, 72 (I903), the court saying: " For the purposes of the pres-
ent case, it is not necessary to consider the unissued stock otherwise than as mere
property, over which the powers of the directors are the same as over any other

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 CORPORATE POWERS AS POWERS IN TRUST I05I

this is obvious; but it would by no means necessarily follow that

the law would adopt the mathematical rule. Statutory provisions
requiring payment for stock in cash or property afford no ground
for an assumption as to which of the two lines of thought in-
fluenced the legislature. It was left to the courts first to interpret
the statutes in this sense, and later to evolve the same result in
the absence of statute and even in the face of provisions apparently
granting to corporate managements wide latitude as to what and
how much consideration should be required to justify the issuing
of stock. As long ago as I8762 a requirement by statute that all
stocks should be subscribed for "in good faith " caused an Illinois
court to hold that stock issued for a nominal consideration was
void; and in this case the thrust of the decision was primarily the
protection of other shareholders.
Almost at once, however, the question arose in a new form.
Statutory provisions generally provided for the issue of stock for
property received." ' Property " is a word so broad as to in-
clude almost every definable fragment of value capable of being
transferred. In its wide sense under these provisions stock could
be issued for a note of the subscriber (negotiable instruments being
certainly personal property), goodwill, contracts for services to be
rendered, and a whole range of intangible elements of a similar sort.
Commonly these provisions were accompanied by the requirement

assets of the corporation, namely, to sell to whom and at such prices as to them
shall seem best for the corporation and all its stockholders, in the honest exercise
of the discretion and trust vested in them. Even then, however, their duties with
reference thereto are fiduciary; they are bound to act uberrima fides for all stock-
holders. To dispose of or manage property of the corporation to the end and for
the purpose of giving to one part of their cestuis que trustent a benefit and ad-
vantage over, or at the expense of, another part, is breach of such duty, especially
when the directors themselves belong to the specially benefited class." This case
merely carried forward the line of thought marked out by the Massachusetts court
in Hayward v. Leeson, I76 Mass. 3I0, 57 N. E. 656 (I900), that the fiduciary duty
extends to present and prospective shareholders, a doctrine which in turn neces-
sarily follows from the reasoning of the court in Gray v. Portland Bank, 3 Mass.
363 (I807).
2 People v. Sterling Mfg. Co., 82 Ill. 457 (I876), where the court's difficulty
arose from the fact that the voting rights granted to the common stock were equal
to those granted to the preferred, though the former invested only $5o,ooo and the
latter $950,000. Of course, whenever the words " good faith " appear, the language
in and of itself imports a certain fiduciary quality. In normal business trans-
actions, the state of mind of the opposite party is not a factor; it is enough if
there is actual consent without deceit.

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 I052 HARVARD LAW REVIEW

that the par value of stock (prior to 1912 non-par stock was
unknown), if not paid in cash, must be paid in by a transfer of
" property." The courts were at once faced with the problem of
determining whether all property could be so received; and if not,
of distinguishing between types of property to be accepted and
types to be rejected, and giving a reason for the distinction.
Greater latitude was introduced at once because, while the meas-
ure of cash is always cash, property must be appraised, and there
is great leeway for difference in valuation. The judicial reasoning
on both questions is by no means clear in its groundwork; but on
both issues the results, particularly in retrospect, are astonishingly
plain. Thus, courts declared a note of the subscriber insufficient
consideration,3 except when it was adequately secured,4 in which
case the security element made the note " property " within the
terms of the now judicially amended statutes. This was further
defined in one case where the security was worthless stock, by
throwing out even a secured note of the subscriber. What hap-
pened here was that the courts permitted the corporation to issue
stock against one type of risk and declined to permit its issue
against other types of risk. The obvious rationale of the decisions
is that the former reasonably protected both creditors and stock-
holders; the latter did neither.
The question subsequently came up as to patents, obviously
property, as remarked by one court, but

" There is no species of property the value of which is more uncertain

than letters patent which secure to the patentee the exclusive right to
manufacture the patented article. From the nature of the property,

3 Alabama Nat. Bank v. Halsey, I09 Ala. i96, ig SO. 522 (1895); Jones Drug
Co. v. Williams, I39 Miss. I70, I03 SO. 8IO (I925); Southwestern Tank Co. v.
Morrow, II5 Okla. 97, 24I Pac. I097 (I925); Kanaman v. Gahagan, iii Tex. i70,
230 S. W. I4I (I92I); see (I926) io MINN. L. REv. 536; (I930). 39 YALE L. J.
706, 712. But it does not follow that a note so taken is necessarily unenforceable
as against the maker, which has given rise to confusion in the result of these
cases. See Pacific Trust Co. v. Dorsey, 72 Cal. 55, I2 Pac. 49 (1887); Goodrich v.
Reynolds, Wilder & Co., 3I Ill. 490 (I863); German Mercantile Co. v. Wanner,
25 N. D. 479, I42 N. W. 463 (1913); Schiller Piano Co. v. Hyde, 39 S. D. 74,
I62 N. W. 937 (I9I7).
4 See the discussion in Sohland v. Baker, i5 Del. Ch. 43I, I4I Atl. 277 (I927).
For a case in which the facts and the statute forced a decision that even a secured
note was not property, see Walz v. Oser, 93 N. J. Eq. 280, ii6 Atl. i6 (I922).

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 CORPORATE POWERS AS POWERS IN TRUST I053

the real value of patents can only be determined after the invention
is introduced and in use.`

Accordingly the quality of the property was referred back to the

question of valuation; and in respect to patents this is generally
the rule. It will be noticed that this is a less rigid rule, permitting
more latitude, and permitting protection of the interests actually
involved. A contract for the services of an outsider to help pub-
lish a history has been held not " property " within the meaning
of these statutes.6 Goodwill -well understood as property in
other fields of law, and differing from tangible property only in
that it is more difficult to reduce to definite appraisal-has been
treated both ways; one case disallowed it completely; 7 others left
the question open for the determination of the possibility of a
demonstrable valuation.8
Once in the valuation field, judicial modification of liberty
of action becomes even more striking. Both of the principal rules
on the subject -the rule that stock may be issued for property
at its " absolute value," as over and against the rule that stock
may be issued for property upon such valuation as reasonable
business men would approve under the circumstances - merely

Insurance Press Co. v. Montauk Co., 103 App. Div. 472, 475, 93 N. Y. Supp.
134, 136-37 (1905).
6 Stevens v. Episcopal Church History Co., 140 App. Div. 570, 125 N. Y. Supp.
573 (i9io). But see Van Cott v. Van Brunt, 82 N. Y. 535 (i88o), where the work
done had to be paid for in stock and such stock was issued in good faith. The
issue was upheld even though the labor might not be worth the par value of the
stock issued.
7 Coleman v. Booth, 268 Mo. 64, i86 S. W. 102I (I9I6), a case weakened by
the fact that the circumstances raised the issue of probable fraud.
8 This would seem to be the rule in New York. The case of Gamble v. Queens
County Water Co., 123 N. Y. 9I, 25 N. E. 201 (i8go), raised the problem of validity
of issue of stock for water mains and connections in adjacent territory. Concededly,
the cost of the property was less than the amount of stock issued. Yet its strategic
location might very well give it a value to the issuing corporation in excess of cost.
The New York Court of Appeals directed a new trial, instructing that this ele-
ment be taken into consideration. The prospective earning power of the develop-
ment - substantially goodwill in the modern understanding of that term - would
appear thus to be recognized at least in connection with tangible property.
9 See DODD, STOCK WATERING (1930) 57 et seq., 77. Dr. Dodd comes to the
conclusion that there is no sharp distinction between the rules such as is com-
monly assumed by the bar, the fact being that courts starting from apparently op-
posite premises reach pretty much similar results.

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I054 HARVARD LAW REVIEW

give the courts the power to correct unconscionable issues of stock,

whether they use the value of the consideration or the directors'
morals as the primary test. The attempt to create a rule that the
judgment " in good faith " of the board of directors shall be con-
clusive has received only minor support in the cases; 10 but these
holdings necessarily force back even further upon the board of
directors the decision as to what constitutes a fair and conscionable
consideration for the issue.
In determining both the nature of the property for which stock
may be issued, and the valuation at which property may be taken
to justify the issue of stock, courts have consistently rejected
apparently absolute tests set out by statute and carried forward
by corporate charters, and have substituted (as they needs must)
a test for the conduct of the corporate management. In practi-
cally every case this conduct is couched in terms of " good faith,"
except where the situation has been carried to the point in which
apparently the courts thought that no group in " good faith"
could justify its action.
The moment, however, that " good faith " is introduced in the
picture the fiduciary principle is raised. The phrase implies good
faith towards someone, arising out of some previous relation. The
argument has never been made that directors " in good faith "
would believe it desirable for one group of men (not otherwise
contributing) to pay one-third the contribution to the corporate
capital required from everyone else." Nor would such an argu-

10 Among the cases in this sense are Troup v. Horbach, 53 Neb. 795, 74 N. W.
326 (I898); Holcombe v. Trenton White City Co., 8o N. J. Eq. 122, 82 Atl. 6i8
(1912); Van Cott v. Van Brunt, 82 N. Y. 535 (i88o); American Tube & Iron Co.
v. Hays, i65 Pa. 489, 30 Atl. 936 (I895); Kelley Bros. v. Fletcher, 94 Tenn. I, 28
S. W. 1099 (I894).

The majority rule requires that a value must be set on the property taken for
stock such as would be approved by prudent and sensible business men under the
circumstances, exclusive of visionary or speculative hopes. See Detroit-Kentucky
Coal Co. v. Bickett Coal & Coke Co., 25I Fed. 542 (C. C. A. 6th, I9I0); State
Trust Co. v. Turner, iii Iowa 664, 82 N. W. 1029 (I900) (no statute involved);
Ryerson & Son v. Peden, 303 Ill. 171, 135 N. E. 423 (1922); Jones v. Bowman,
i8i Ky. 722, 205 S. W. 923 (I9I8); Van Cleve v. Berkey, 143 Mo. 109, 44 S. W.
743 (i897) (result reached without benefit of statute); Gates, Adm'r v. Tippecanoe
Stone Co., 57 Ohio St. 60, 48 N. E. 285 (1897) (without statutory test); Cole v.
Adams, 92 Tex. 17I, 46 S. W. 790 (i898).
11 Conceivably, all of the parties might agree that one set of stockholders
should pay less than another. See the discussion in Welton v. Saffery, [1897] A. C.

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 CORPORATE POWERS AS POWERS IN TRUST I055

ment find much favor in any court. The "good faith"? phrase
is merely a shorthand way of saying that the directors must
use their power to test the quality and appraise the value of the
consideration offered for stock in such a manner that creditors
and shareholders will not be hurt.
This is, in rough outline, the result of the cases down to the
advent of non-par stock. With the appearance of this device
legal concern for the protection of the creditors largely passed
away.12 There remained the proper protection of the interests
of the other shareholders; and this consideration at once became
paramount. Commencing with the decision that non-par stock
could not be issued for nothing, as a bonus,13 there ensued a de-
cision holding that such stock must be issued at approximately
equal prices at the same time to all concerned.14 This decision
was subsequently modified by the Circuit Court of Appeals into
a rule that where there is an inequality of consideration exacted,
reasons nmust appear justifying the board of directors in making
the distinction.15 And the test of justification was whether the
amount of consideration required was or was not sufficient to
operate as a protection to the remaining shareholders.

(2) The rule that after stock has been issued additional stock may
be issued only (a) at a price or under circumstances which protect
the equities of the existing shareholders or (b) in accordance with a
scheme which permits the existing shareholders to protect their equities
by subscribing for a ratable amount of the additional stock.

When the stock is without nominal or par value, there is usually

direct authority, as clear as can be derived from words, permitting

299 (H. L.), in which both the majority and the dissenters agreed that there was
nothing essentially impossible in such an agreement, but differed as to whether the
text of the statute involved permitted it.
12 Johnson v. Louisville Trust Co., 293 Fed. 857, 862 (C. C. A. 6th, 1923), the
court saying: " The generally, if not universally, accepted theory of the purpose of
such statutes is that they are intended to do away with both the 'trust fund' and
'holding out ' doctrines." The court approved Mr. Cook's remark that the whole
theory of stock without par value is to let the buyer beware and let the creditor
beware.
13 Stone v. Young, 2io App. Div. 303, 206 N. Y. Supp. 95 (I924), the court
saying that the no par stock statute is " no warrant for the gratuitous distribution."
14 Hodgman v. Atlantic Refining Co., 3oo Fed. 590 (D. Del. 1924).
15 Atlantic Refining Co. v. Hodgman, I3 F.(2d) 78I (C. C. A. 3d, I926).

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 I056 HARVARD LAW REVIEW

the directors of a corporation to issue stock as they see fit, when

they see fit, and for any price they see fit. Prima facie this would
appear to be an absolute power. Actually, however, courts have
controlled this power almost from the time its implications be-
came apparent. And there is manifestly no difference between
the issue of non-par stock and the issue of stock having par value,
except that in the latter case statutes and charters prescribe a
minimum issue price (the par value) payable in a more or less re-
stricted form (cash, property of approved quality, services actu-
ally rendered). The situation is approximately the same in both
cases, however, barring only this statutory restriction.
Even statutory restrictions involving a minimum price upon
the issue of par value stock have been swept away by the courts
under circumstances in which it appeared that the position of the
corporation did not permit the issue of par value stock for its par
value,6 but in these cases the courts required that it should be
made to appear both that the stockholders had assented or were
protected under all the circumstances, and that creditors would
not be prejudiced. Faced even with an apparent restriction, the
courts evolved an equitable principle to the effect that under the
circumstances indicated the restriction could be ignored.
Early in the history of corporation law the equitable principle
was developed that prima facie the directors, despite their power
to issue stock, must so issue it that the stockholders would be given
an opportunity to protect their equities by subscribing to ratable
shares of new stock. This rule, evolved in I807 in Gray v. Port-
land Bank,17 probably was misunderstood by the bar and by
courts generally. An examination of the facts in that case makes it
plain that the court did not undertake to lay down a piece of judi-
cial legislation requiring the management to offer stock promiscu-
ously to all shareholders. The court did hold that in that par-
ticular situation the issue of additional shares without permitting
a shareholder to subscribe impaired his equity.18 Judge Sewall

16 Handley v. Stutz, I39 U. S. 4I7 (I89I).

17 3 Mass. 363 (I807).
18 It is noticeable that the court was preoccupied with working out a remedy.
The preamptive right was arrived at after the court had excluded the possibility
of specific relief or of restoration of the stock, and had pointed out that the accu-
mulated dividends were in the hands of third persons, and that the plaintiff had
not paid for the stock anyhow. Judge Sewall thereupon came to the conclusion:

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 CORPORATE POWERS AS POWERS IN TRUST 1057

observed that an incorporation for a bank was " a trust created

with certain limitations and authorities, in which the corporation
is the trustee for the management of the property, and each stock-
holder a cestui que trust according to his interest and shares," 19
and he went on to say that the power to the corporation was "not
a power granted to the trustee to create another interest for the
benefit of other persons than those concerned in the original trust,
or for their benefit in any other proportions than those determined
by their subsisting shares." 20 It followed that the power to in-
crease the number of shares did not " abolish the security of the
members first engaging in it in the beneficial interest and property
they might acquire in the institution." The conclusion was that
4 plaintiff's loss in this case will be compensated by allowing him
the market value of the shares he was entitled to at the time when
he demanded his certificates, and they were refused to him." The
thrust of the case was that, relying on equitable principles to find
the right, the court used equal latitude in evolving a remedy com-
pensating the particular plaintiff.
This was the nascence of the so-called preemptive right. It
would by no means follow that the preemptive right should attach
in every case. But the spirit of the last century sought specific
and rigid rules, and built up the doctrine here laid down into a
rule that all additional shares, whenever issued and whatever the
circumstances, were always subject to a preemptive right. Neces-
sarily the very rigidity of the rule led to equally arbitrary excep-
tions. Some courts declined to attach the preemptive right to
previously authorized but unissued stock (obviously fearing that
the first subscriber to the share of stock would promptly claim a
preemptive right to the entire balance of the issue); 21 courts de-

"Upon the whole, I am of the opinion that the plaintiff's loss in this case will be
compensated, by allowing him the market value of the shares he was entitled to at
the time he demanded his certificates, and they were refused to him " (3 Mass. at
38I), the theory being that at that time the plaintiff could have bought an equiva-
lent number of shares in the open market.
19 3 Mass. at 379.
20 Ibid.
21 Such was the law in New York under the case of Archer v. Hesse, I64 App.
Div. 493, I50 N. Y. Supp. 296 (I914), but the doctrine received a rude shock in
Dunlay v. Avenue M. Garage Co., 253 N. Y. 274 (I930), holding that authorized
but unissued shares could be issued without preemptive right only where it is
" reasonably necessary to raise money to be used in the business of the corporation

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 I058 HARVARD LAW REVIEW

clined to extend the right to treasury stock; 2

New Jersey vice-chancellor who was pressed for a quick decision
over a lunch hour led to the evolution of a third exception - the
issue of stock for property.23 None of these exceptions, perhaps,
need have been labored as the courts evolving them seemed to
think necessary. It would have been simpler to observe that the
circumstances in respect to these particular transactions required
no preemptive right to protect adequately the interests of the
existing shareholders. The case finally came up of an additional
issue of preferred stock which could not by any possibility affect
either the amount of the equity of existing shareholders or their
proportionate voting control; the New Jersey court was forced
to say that in such circumstances there was no reason for the
rule and it thereupon disappeared.24 Commentators on this situa-
tion, with varying degrees of emphasis but with considerable
unanimity, have been forced to two conclusions: first, that the
preemptive right, while a rough and ready protection to common
shareholders in a corporation having only a simple capital struc-
ture, did not fit many situations where there was a complex capital
structure, and frequently was unnecessary even in the simpler
cases; second, that the so-called preemptive right was not a right
at all, but a remedy - a remedy evolved out of equitable principles
- and that unless a situation appeared calling for a remedy and
requiring this particular remedy the right should not necessarily
be assumed to exist.25
The only conclusion that can be drawn from the tangled history

rather than the expansion of such business beyond the original limits." This is the
kind of distinction which satisfies a meticulous jurist and drives a business man to
distraction. Must 1, says he, determine at my peril whether or not the money I
expect to raise by selling stock is for " the business " of my corporation or " the
expansion of such business " ?
22 Borg v. International Silver Co., II F.(2d) I47 (C. C. A. 2d, I925).
23 Meredith v. New Jersey Zinc & Iron Co., 55 N. J. Eq. 21I, 37 Atl. 539
(i897). See the comment in BERLE, CASES AND MATERIALS IN THE LAW OF CORPO-
RATION FINANCE 344. See also Thom v. Baltimore Trust Co., I58 Md. 352, I48 Atl.
234 (1930).
24 General Investment Co. v. Bethlehem Steel Corp., 88 N. J. Eq. 237, I02 Atl.
252 (I9I7).
25 Drinker, Preimptive Right of Shareholders (I930) 43 HARV. L. REV. 586;
Dwight, The Right of Stockholders to New Stock (I908) I8 YALE L. J. IoI; Frey,
Shareholders' Preimptive Rights (1929) 38 YALE L. J. 563; Morawetz, Prelimptive
Rights of Shareholders (I928) 42 HARV. L. REv. i86.

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 CORPORATE POWERS AS POWERS IN TRUST 1059

of preemptive rights is that the doctrine arose from an attempt

to impose an equitable limitation on an apparently absolute power
of directors to issue stock; that it should never have hardened
into a rigid rule of law, and that it should revert to its original
status as a remedy, available in equity and possibly, by transpo-
sition, at law. But it should be considered merely as one of many
possible remedies - certainly not an exclusive one and not neces-
sarily the best one.
In cases where, by reason of the exceptions to the preemptive
right doctrine, no such right existed, courts have had no diffi-
culty in applying equitable remedies of other sorts and kinds.
Thus a Wisconsin court enjoined the issue of shares where the
sole motive was to permit the directors to augment a rapidly melt-
ing majority; 26 a federal court insisted that a sale of treasury
shares must be made either at public auction or at a price which
demonstrably would maintain the equities of the existing share-
holders.27 Non-par stock without a preemptive right was held
to be of such nature that the price paid for it must adequately pro-
tect the existing equities.28 At this point, however, courts ran
into a familiar business situation. Not infrequently it is worth-
while to have a substantial shareholder even though equities are
sacrificed to bring him in. Such was the case in Atlantic Refining
Co. v. Hodgman,29 and the situation being made plain, the court
sanctioned a scheme by which existing equities of approximately
$I6 were sacrificed to permit the entrance of the Atlantic Re-
fining Company on payment of $8 a share in view of the added
strength which that company lent to the issuing corporation
through its connections, its goodwill, and its business tactics.
So, a Delaware court sanctioned the issue of non-par stock at $25
a share, though its market value was $40 a share, where it ap-
peared that the stock was being offered preemptively to existing
shareholders and that the offer of such stock at a low price made

26 Luther v. Luther Co., ii8 Wis. II2, 94 N. W. 69 (I903).

27 Borg v. International Silver Co., 2 F.(2d) 9g0 (S. D. N. Y. I924). The his-
tory of the handling of the sale of this block of treasury stock is peculiarly inter-
esting as an exercise of the equitable power to protect shareholders in the case of
stock freed from the so-called technical rule of preemptive right.
28 Atlantic Refining Co. v. Hodgman, I3 F.(2d) 78I (C. C. A. 3d, 1926);
Bodell v. General Gas & Elec. Corp., i5 Del. Ch. II9, 132 Atl. 442 (1926).
29 Supra note 28.

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io6o HARVARD LAW REVIEW

it possible for the corporation to obtain

issued to outsiders with full knowledge o
The language of the Delaware court in c
of no par stock is interesting not merely
such stock, but for its bearing on the ge
After pointing out the absolute authorit
issue such stock at any price they deemed
" The statute does not impose any restraint
bridled power of the directors. Whether equ
the principles which prompt it to restrain a
in absolute terms, lay its restraining hand u
an abuse of this absolute power, is another q
ently considered and answered in the affirm
the absolute character of the language in whic
is expressed, it cannot be that a court of equ
cases to circumscribe it. The section requir
consideration. It certainly would be out of
court could review their action in fixing it.>?

And the court went on to point out th

situation of fiduciaries; and while not " tr
of the term, yet for convenience they
such."
The foregoing is by no means a complete resume of the limita-
tions which courts have thrown around the issue of shares de-
spite an apparently absolute power granted to the management.
Enough has been said, however, to indicate the completeness
with which the apparently absolute power has been circumscribed,
and the principal lines of limitation which have been thrown
around this power.

B. The power to declare or withhold dividends must be so used

as to tend to the benefit not only of the corporation as a
whole but also of all of its shareholders to the extent that
this is possible.

Among the rules worked out are:

(i) The rule that dividends must be withheld only for a business
reason: private or personal motives may not be indulged.

30 Bodell v. General Gas & Elec. Corp., supra note 28, at I28-29, I32 Atl. at 446.

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 CORPORATE POWERS AS POWERS IN TRUST io6i

The statute and charter alike accord to the directors the power
to declare dividends, and impose no limitation on them in so doing
or declining so to do except (normally) that dividends may not
be declared out of capital or (in most instances) where the capital
is impaired. Beyond this their power is at least nominally abso-
lute. Despite this, where dividends were withheld in a family
corporation because the father of the family decided that the share-
holders who were other members of the family needed discipline,
a court directed the declaration of dividends.31 In another case,
where the object of withholding dividends was to depress the price
of stock in the market, presumably to enable the management or
its friends to buy in such stock at a lower price (a process collo-
quially called " freezing out "), the court again intervened.3"
Where, also, the primary object of the transaction was to accu-
mulate a large surplus ultimately available for' objects which Mr.
Henry Ford believed to be to the general good of the community,
an order was made requiring the declaration of dividends; 3 and
generally, where dividends are " unreasonably withheld " courts
have interfered to control the use of the power.34

(2) The rule that dividends may not be withheld so as to benefit

one class of stock as against another class, save where there is a business
situation requiring such action.

The rule stated in the caption has been the subject of contro-
versy in recent years. Wherever the corporate charter includes
in its financial structure non-cumulative stock or its equivalent
(participating preferred stocks form such equivalent in a great
majority of instances) it is possible, by timing the dividend decla-
rations properly, to withhold earnings and to use these for the
purpose of building up surplus which subsequently falls to junior
stock. A New Jersey court and two federal courts came to the
conclusion that where dividends were earned, they must be either
declared or set aside as a dividend credit to the stock which would
have been entitled to such dividends had they been declared an-

31 Channon v. Channon Co., 2I8 Ill. App. 397 (I920).

32 Anderson v. Dyer, 94 Minn. 30, IOI N. W. io6i (I904).
33 Dodge v. Ford Motor Co., 204 Mich. 459, I70 N. W. 668 (i9I9).
34 See Wilson v. American Ice Co., 206 Fed. 736, 745 (D. N. J. I9I3). The
cases are collected in (I9I9) I4 C. J. ? I235.

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 Io62 HARVARD LAW REVIEW.

nually or periodically.35 This doctrine must be regarded as

shaken if not completely overset by the recent Supreme Court
ruling in Barclay v. Wabash R. R.3"
That decision does not go as far as is currently supposed, since
the only ratio decidendi is that although non-cumulative divi-
dends, earned but unpaid, have not been paid out to the non-
cumulative preferred shareholders, dividends may, nevertheless,
be paid to the common stock provided the non-cumulative divi-
dend for the year in question has been declared and paid. The
facts are worth a glance. The Wabash Railroad had issued non-
cumulative preferred stock. Over a period of years the unpaid
dividends on this stock amounted to some $I6,ooo,ooo. Year by
year the railroad had earned sufficient profits to pay these divi-
dends had the directors elected to declare them. The directors
did not do so, but converted the earnings into surplus. Finally;
having paid the dividends on the non-cumulative stock in one
year, they then undertook to inaugurate dividends on the common.
A bill for an injunction was brought by a preferred shareholder;
and the Supreme Court reversed a decision of the Circuit Court
of Appeals granting the injunction. It is to be noticed, however,
that the payment of dividends to the common stock in no way
cut into the $I6,ooo,ooo accumulated by withholding dividends
on the cumulative preferred; the question remains open, therefore,
as to the ultimate disposition of the surplus so created. Even
assuming that the Wabash case would permit the distribution of
this surplus to the common shareholders, as by a liquidation or
in subsequent dividends, the Supreme Court above and the dis-
senting opinion by Judge Learned Hand below both indicated
that where withholding the non-cumulative dividend was unrea-
sonable, a preferred shareholder could bring his suit to compel
the declaration of the dividends; and Judge Hand intimated that
a design to withhold dividends on the one class of stock so as to
benefit the junior stock would in and of itself (and nothing appear-
ing to the contrary) be evidence showing unreasonableness.

35 Basset v. United States Cast Iron Pipe Co., 75 N. J. Eq. 539, 73 Atl. 5I4
(I909); Collins v. Portland Elec. Power Co., 12 F.(2d) 67i (C. C. A. gth, 1926);
Barclay v. Wabash Ry., 3o F.(2d) 260 (C. C. A. 2d, 1929).
36 280 U. S. i97 (1930), rev'g Barclay v. Wabash Ry., 3o F.(2d) 260 (C. C. A.
2d, 1929).

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 CORPORATE POWERS AS POWERS IN TRUST I063

It would seem, therefore, that by way of dictum at least, even

the jurisdictions following the Wabash case have indicated a cer-
tain measure of equitable protection where the declaration of
dividends is manipulated primarily with a view toward benefiting
one class of stock as against another class, leaving latitude only
where a business situation exists in which it may reasonably be
said that the withholding of the dividend will ultimately work for
the benefit of the corporation as a whole, and that the benefit will
be spread with substantial equity over the various classes.

(3) The rule that there may be no discrimination between share-

holders of the same class, and no discrimination between any shareholders
except as provided in the charter.

This rule, whether worked out in equity or from a " presumed

interpretation " of simple contract, is fundamental.37 It requires
no discussion here save to point out that it forms one of the
standard safeguards in equity against the unreasonable manipula-
tion of dividend policy.

C. The power to acquire stock in other corporations must be so

used as to tend to the benefit of the corporation as a whole
and may not be used to forward the enterprises of the man-
agers as individuals or to subserve special interests within
or without the corporation.

The rule above stated is probably honored more in breach than

in present practice, but there seems to be no reason to doubt its
existence as a matter of law. The rule has a history which may
be briefly sketched here. Leaving aside special restrictive statutes
of which there are many, and assuming a full kit of statutory and
charter powers to purchase stock, courts have, nevertheless,
limited the use of this power almost from the beginning of cor-
porate history.38 Thus it has been insisted that where one cor-

37 Cases are collected in (I9I9) I4 C. J. ? 1236.

38 The first line of limitation was that the mere existence of a corporation im-
plied that its powers should be exercised and its capital extended through its own
officers and employees and not indirectly through another corporation operated
under its control. Anglo-American Land Co. v. Lombard, 132 Fed. 721, 736
(C. C. A. 8th, 1904); see also People v. Chicago Gas Trust Co., I30 Ill. 268, 22 N. E.
798 (I88)); Elkins v. Camden & Atlantic R. R., 36 N. J. Eq. 5 (I882).

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 io64 HARVARD LAW REVIEW

poration purchases stock in another, such purchase must tend to

forward the " primary " purpose of the corporation; as one court
said,

" whether the purchase of stock in one corporation by another is ultra

vires or not, must depend upon the purpose for which the purchase was
made, and whether such purchase was, under all the circumstances, a
necessary or reasonable means of carrying out the object for which
the corporation was created, or one which under the statute it might
accomplish." 39

This would mean little if the " object " of the corporation could
be ascertained by merely reading the "object clauses" in its
charter. It seems plain, however, that in ordinary circumstances
the situation is more complicated than that. For instance,
although the Prudential Insurance Company certainly had power
to purchase stock, where it proposed to buy a majority of the stock
of the Fidelity Trust Company which already owned a majority
of stock in the Prudential Insurance Company, and the result of
the scheme was to create a situation in which the management
could maintain itself perpetually in office, the court observed that
the purchase was not for the purpose of making an investment
(which the insurance company could do) but for the purpose of
carrying out a scheme of corporate control of advantage to the
management individually.40 Accordingly, the transaction was en-
joined. One may suggest that a so-called investment trust which
used its funds for the purchase of shares not primarily for invest-
ment but for the purpose of obtaining control of a corporation to
the advantage of the managers of the investment trust, would
come under the same condemnation.4'

39 Hill v. Nisbet, I00 Ind. 34I, 349 (I884).

40 Robotham v. Prudential Ins. Co., 64 N. J. Eq. 673, 53 Atl. 842 (I902).
41 This is a problem which should be a matter of general concern. Some bil-
lions of dollars have been acquired by so-called " investment trusts." The theory
is that the investment trust managers or officers can supplant the individuals in
the management of funds, with advantage to the latter by reason of the peculiar
experience and information which the managers have. These rapidly turn up as
devices by which the investment trust managers claim actual or partial control of
a series of unrelated corporations. Dillon, Read & Co. are said by this means to
have obtained representation on the board of the Rock Island Railroad. It was
charged that by this means Cyrus Eton sought to control the Youngstown Sheet
and Tube Co. These are two of many instances.

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 CORPORATE POWERS AS POWERS IN TRUST I065

Purchases of stock by one corporation in another commonly

fall into two categories. In the one case the purchase does not
involve control of the corporation whose stock is being purchased.
In this situation normally the only problem is whether the pur-
chase can fairly be treated as an investment by the purchasing
corporation. The second category involves situations in which
the purchasing corporation acquires control over a second cor-
poration by buying a controlling block of its stock. Here the
naked power to purchase is an insufficient justification. Trans-
actions have been steadily enjoined unless-the corporation can
justify its purchase on the ground that the controlled corporation
may furnish facilities or materials in carrying out its objects, or
is engaged in substantially the same enterprise, or that the pur-
chase aids a corporation usefully to the buyer's business.42 Fail-
ing such justification, the purchase is frequently enjoined.
The ground of prohibition is commonly called "ultra vires."
At first blush this seems to be a long way from equitable limita-
tion. Yet on closer analysis it develops that the words, " ultra
vires " are here used in a sense quite different from that usually
applied to the familiar phrase. The courts do not deny the
" power " to make the purchase. What they say is that by reason
of the object, the power is not well exercised. The only conclusion
which can be drawn is that the courts have weighed the power in
the light of the circumstances and have in certain cases declined
to sanction its use - a position quite different from asserting that
the power does not exist. The criteria adopted in cases where the
purchasing corporation is buying control of another, concern
management issues in practically every case - a comparison of the

42 Among the many cases may be cited: Edwards v. International Pavement

Co., 227 Mass. 206, ii6 N. E. 266 (I9I7); Fernald v. Ridlon Co., 246 Mass. 64,
I40 N. E. 42I (I923); Dittman v. Distilling Co. of America, 54 Atl. 570 (N. J. Ch.
I903); State v. Missouri Pac. Ry., 237 Mo. 338, I4' S. W. 643 (i9II); Eller-
man v. Chicago Junction Ry., 49 N. J. Eq. 2I7, 23 Atl. 287 (I89I). On the other
hand, see: Sumner v. Marcy, Fed. Cas. No. I3,609 (D. Me. I847); Pauly v.
Coronado Beach Co., 56 Fed. 428 (S. D. Cal. I893); Savings Bank v. Meriden
Agency, 24 Conn. I59 (I855); Hunt v. Hauser Malting Co., go Minn. 282, 96
N. W. 85 (1903); Bank of Commerce v. Hart, 37 Neb. I97, 55 N. W. 63I (I893);
Nebraska Shirt Co. v. Horton, 93 N. W. 225 (Neb. 1903). In these last cases, pur-
chase of stock by a corporation in another corporation was enjoined, the theory
being that the object of such purchase did not tend to fulfil or round out the
primary objects of the buying corporation.

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io66 HARVARD LAW REVIEW

purposes of the two corporations, an examination of the relation

between them, an assessment of the motive with which the pur-
chase is made. Unless a reasonable connection can be found be-
tween the purposes, and an advantage to the corporation arises
from linking the two concerns, and the motive has been to benefit
the corporation as a whole, the purchase stands a good chance of
being thrown out, although the paper authority is on its face
unlimited.43
Manifestly, we are only on the eve of a development of law in
this respect. Of recent years aggregations of capital have been
collected from the public sale of stock in corporations with paper
powers which are broad enough to permit them to rove the world
at will. These are nominally supposed to be " investment " or
"trading" corporations. Presently, however, it develops that
their funds have been so invested as to give control of one or
more enterprises to the bankers managing the so-called invest-
ment or trading companies. In other words, the purpose of the
corporation is investment; but the power to purchase stock has
been used, not for investment purposes, but to forward the control
of the managing group in extraneous fields. The " investment
trust " has suddenly become a holding and management company.
Quaere if this was the " object " of the corporation.

D. The reserved power of the corporation to amend its charter

must be so exercised that the result will tend to benefit the
corporation as a whole, and to distribute equitably the benefit
or the sacrifice, as the case may be, between all groups in the
corporation as their interests may appear.

43 The question remains open as to whether a corporation may not have as its
primary purpose the use of its funds in a fashion analogous to a " blind pool."
The older corporation statutes do not readily permit a corporation so to state its
objects. The modern corporate form does permit precisely this. It would seem
that the avowed object of the corporate management, particularly as announced to
the public in the publicity surrounding the issue of its stock, might well indicate the
primary purposes " sought for in these cases.
In any case, a studied trend toward liberality in permitting purchases of stock
in other corporations is noticeable. One reason for this seems to be that no field
of business is necessarily disconnected from any other field under the prevailing
circumstances; it would be a courageous court which would undertake to tell the
directors of an enterprise that another area of business necessarily lay outside the
scope of reasonable and profitable connection with their enterprise.

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 CORPORATE POWERS AS POWERS IN TRUST I067

Since the power to amend the charter or by-laws is normally

conferred on a majority of shareholders, we are manifestly now
dealing with a somewhat different group from that heretofore
considered. In principle, however, this would seem to make little
difference. A power in the one case exercised by the directors
is here exercised by the majority. There is a difference in one
respect. The vote of shareholders would at least tend to create a
presumption that the action taken benefited all of such share-
holders.44 The presumption is apparently subject to be rebutted
either by proof that the majority is a compact group having
interests adverse to the corporation as a whole or to the
other classes,45 or, possibly, by the mere fact of adverse inter-
ests, though this last is not so clear. Ultimately courts may take
judicial notice of the "rubber-stamp" quality of most stock-
holders' votes.
In general, however, power granted to a majority must be re-
garded as standing on the same footing with power granted to the
management. While an individual shareholder normally is not
required to exercise his voting rights in a fiduciary capacity,46
nevertheless the power of a majority is subject to certain equitable
limitations, which appear to differ under varying states of fact.
Thus, a majority composed of scattered shareholders, not actuated
by a unifying interest, nevertheless must not so exercise its power

44 See BERLE, STUDIES IN THE LAW OF CORPORATION FINANCE (I928) (" Non-
voting Stock and Bankers' Control "). And the presumption would certainly not
exist as regards shares which did not vote. For instance, in the case of a vote of
common stockholders reducing capital and thereby reducing the " cushion" or
security behind preferred shares, which did not vote on the reduction.
45 The language of the court in Davis v. Louisville Gas & Elec. Co., I42 Atl. 654
(Del. 1928), would seem to indicate this. The court, after remarking that where a
large majority of stockholders have voted for the change there is a presumption
of good faith, then examined where stock most hurt by the amendment was held,
and pointed out that since the management itself stood to be most prejudiced by
the change, the presumption of good faith would be difficult to rebut. But the
implication is plain that the presumption is rebuttable. One may feel, however,
that the court's examination of the facts was hardly complete. A public utility
holding company (the majority holder in the Davis case) might well have an in-
terest in sacrificing both its own and the minority interests in one company in
order thereby to forward the interests of a quite different company.
46 North-West Trans. Co. v. Beatty, [1887] 12 A. C. (P. C.) 589; Camden &
Atlantic R. R. v. Elkins, 37 N. J. Eq. 273 (1883) (but quaere whether this case
would be decided in the same mnanner today).

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 io68 HARVARD LAW REVIEW

as to " confiscate " the rights of the minority, nor so as to op-

press them unreasonably.4" The mere power concentrated in the
hands of, say, a parent corporation, or of the management itself,
appears to be tested by rules almost exactly like those applicable
to boards of directors. Where the majority power is in fact
exercised by or through the management or its control, courts take
cognizance of that fact.48
To the principle of equitable control of the power to amend
the certificate of incorporation, there seems to be not a single
exception in any American jurisdiction. The stringency of the
control varies. In substantially all states it is held that no amend-
ment of the certificate of incorporation can interfere with certain
specific rights. The principal example of this is the right of a
holder of accumulative preferred stock to be protected against any
amendment which disturbs accrued unpaid cumulative dividends.49
This is familiarly spoken of as a " vested right," though the phrase
states a conclusion rather than an argument. As a matter of
strict English, the right to have unpaid cumulative dividends
charged as a preference against the net assets of the corporation
seems not different in kind from the right to receive a preference
on liquidation up to a stated amount. As such, the former would
seem to be as subject to amendment as the latter under a reserved
power to alter "preferences." Nevertheless, practically every
case on the subject prohibits an amendment modifying accrued
cumulative dividends, substantially on the theory that to do so is
an oppression of the preferred shareholder.

47 New Haven & Derby R. R. v. Chapman, 38 Conn. 56 (i870); Perkins v.

Coffin, 84 Conn. 275, 79 Atl. I070 (i9ii); Lonsdale Corp. v. International Mer-
cantile Marine Co., ioi N. J. Eq. 554, I39 Atl. 50 (I927); Kent v. Quicksilver
Mining Co., 78 N. Y. I59 (I879).
48 Central Trust Co. v. Bridges, 57 Fed. 753 (C. C. A. 6th, I893); Kavanaugh
v. Kavanaugh Knitting Co., 226 N. Y. I85, I23 N. E. I48 (IgIg). The same rule
in a different form appears in Farmers' Loan & Trust Co. v. New York & Northern
Ry., I5o N. Y. 4IO, 44 N. E. I043 (I896). See also Outwater v. Public Serv. Corp.
of New Jersey, infra note 56.
49 Yoakum v. Providence Biltmore Hotel Co., 34 F.(2d) 533 (D. R. I. I929);
Morris v. American Pub. Util. Co., I4 Del. Ch. 136, I22 Atl. 696 (I923); Lonsdale
v. International Mercantile Marine Co., Ioi N. J. Eq. 554, I39 Atl. 50 (I927). But
even this right was questioned in Windhurst v. Central Leather Co., ioi N. J. Eq.
543, 138 Atl. 772 (1927), where the corporation was in such bad condition that
failure to modify such rights might have been disastrous.

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 CORPORATE POWERS AS POWERS IN TRUST i o6g

Certain states, notably New Jersey, enlarge this area of " vested
rights." 0 A majority of jurisdictiong appear to permit the
amendment upon a showing that the business interests of the
corporation, including the class of stock whose preferences are
affected, require the change. Even Delaware, the loosest of juris-
dictions, suggests, obiter, that if a showing can be made that the
majority is acting adversely to the minority, primarily to benefit
itself as against the minority, without corresponding compensa-
tion through business strength or otherwise to all concerned, an
injunction will issue.5" This process of advantage to one group at
the expense of another is usually described under the loose and
somewhat misleading term " fraud "; but the meaning seems plain.
The nmajority of amendments, even those cutting down specific
contract rights such as the right to a fixed dividend, the right
to a fixed preference in assets, and the right to a stated participa-
tion, are commonly sustained; but no court seems to have based
its decision on the naked power to amend. In every case, the
equities have been examined, the business situation considered,
and the reasoning upholding the amendment has been grounded
on the theory that the amendment was under the peculiar circum-
stances equitable for all concerned. There may be dispute on the
facts; there certainly is ground for believing that few dissenting
stockholders are in a position to cope with the management
(which commonly represents the majority) in a battle to determine
where the business interests of the group as a whole really lie. But
it can not be said that the results lend any color to the proposition
that an absolute right to amend the charter has ever been recog-
nized despite the plain power granted by statute and carried for-
ward by appropriate provision in the certificate of incorporation.

E. The power to transfer the corporate enterprise to another

enterprise by merger, exchange of stock, sale of assets or
otherwise, may be exercised only in such a manner that the
respective interests of the shareholders of all classes are re-
spectively recognized and substantially protected.

Substantially all corporate statutes today grant to corporations

created under them the power to unite with other enterprises or

50 Lonsdale v. International Mercantile Marine Co., supra note 49.

51 Davis v. Louisville Gas & Elec. Co., 142 Atl. 654 (Del. Ch. 1928).

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 I070 HARVARD LAW REVIEW

to transfer their activities to other corporations. Various mecha-

nisms are provided to this end. The old power to merge and
consolidate is historic; the power to lease all of the assets fol-
lowed; today, the result is more often obtained by a sale of the
assets to the acquiring entity in return for an assumption of all lia-
bilities and for a block of stock, which stock is in turn distributed
to the stockholders of the transferring corporation. Another
method is the individual transfer by shareholders of their stock in
exchange for stock of the acquiring corporation, or in exchange for
stock of a holding company, the process becoming complete when
a controlling majority of the shares of stock has been so ex-
changed. Financial jargon lumps all these processes, as well as
other more recondite methods, under the loose word " merger."
This power was not inherent in a corporation; historically, it
could be exercised only by unanimous consent."2 Under an early
decision, the power to sell the assets, for example, did not include
the power to take stock of another corporation in compensation
and to force this stock down the throats of the old shareholders;
but the ground of the decision was lack of power, not misuse of
power.53 The modern statute, however, contains such authority,
and the modern corporate charter carries forward the authority
by inserting an appropriate provision suggesting corporate action
by which the authority may be exercised.
In its earlier phases, it was thought that the validity of a
merger was tested by power only - a decision flatly contrary to
the thesis of this essay. A federal court once remarked that
where a sale of assets had taken place and the proceedings con-
formed to the organic law, it did not matter " that the majority
were actuated by dishonorable or even corrupt motives, so long
as their acts were legitimate. In equity, as at law, a fraudulent
intent is not the subject of judicial cognizance unless accom-
panied by a wrongful act." Subsequent decisions, however,
have obliterated this doctrine. Thus in Windhurst v. Central

52 See BALLANTINE, CORPORATIONS (I928) 594-95.

53 International & Great Northern R. R. v. Bremond, 53 Tex. 96 (I88o).
54 Ervin v. Oregon Ry. & Nav. Co., 20 Fed. 577, 580 (C. C. S. D. N. Y. I884),
aff'd, 27 Fed. 625 (C. C. S. D. N. Y. I886). The quotation belies the actual de-
cision; the court ultimately held the transaction inequitable, and charged the new
corporation's assets with a lien in favor of complainants.

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 CORPORATE POWERS AS POWERS IN TRUST I07I

Leather Co.,55 the court remarked: " Every case must to some
extent stand on its own facts as they are affected by the principles
and doctrines of equity," a decision which sets out substantially
the doctrine of the modern cases. So, where a corporation owned
properties leased to a public service corporation,56 the corporate
income being the lease rental, and the lessee corporation acquired
a majority of the stock of the lessor and then attempted to force a
sale of the assets in consideration of preferred stock of the lessee
corporation, the transaction was enjoined since in equity the rights
of the stockholders of the lessor were being reduced from a first
charge on the property of the lessee by way of rental, to a junior
charge in the form of preferred dividends. The court made an
added point of the fact that the preferred stock was redeemable in
three years, so that the transaction amounted to an option by the
lessee corporation to buy out its lessor. In that case, the court
did not even require a showing of actual fraud; and, after con-
ceding that the merger agreement was " in legal form," remarked,
" The agreement calls for careful judicial scrutiny, and the bur-
den is on the majority to show that the consideration is fair and
equitable, and judgment, as to fairness, is not to be influenced by
the heavy vote of approval, as it otherwise would be if the vote
were independent." 6 The last remark was, of course, occasioned
by the fact that the majority stock voting in favor of the transac-
tion was owned by the lessee corporation which benefited from it.
An earlier case, Jones v. Missouri-Edison Elec. Co.,58 dealt with
a merger, likewise carried out in scrupulous accord with the legal
requirements, in which the equities of the shareholders of one of
the merging corporations were tremendously diluted. Here, the
merger was an accomplished fact and the eggs could not be un-
scrambled. The appellate court remanded the case to the court
below with instructions to work out appropriate relief, and pointed
out that the directors were in substance trustees for shareholders,
that a majority having control was in much the same position,
and that a dilution of the equity of the minority was a breach of

55 ioi N. J. Eq. 543, 138 Atl. 772 (I927).

56 Outwater v. Public Serv. Corp.. of New Jersey, I03 N. J. Eq. 46I, I43
729 (I928).
67 Id. at 464, I43 Atl. at 730.
58 I35 Fed. I53 (E. D. Mo. I905), aff'd, I44 Fed. 765 (C. C. A. 8th, igo6).

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 1072 HARVARD LAW REVIEW

trust. The court took occasion to say: " The fraud or breach of
trust of one who occupies a fiduciary relation while in the exercise
of a lawful power is as fatal in equity to the resultant act or con-
tract as the absence of the power." 5
In a New York case, Colby v. Equitable Trust Co.,6" the court
faced a situation in which there was a dilution of the stock in one
of the merging corporations. On examination, however, the busi-
ness situation indicated that that corporation had been running a
losing race and was facing an uninviting future. The court,
taking these facts into consideration, came to the conclusion that
the merger was not "so unfair and unconscionable . . . that
a court of equity should interfere and prevent its consummation."
There are many similar cases. Though an equitable limitation
was applied in favor of pro rata control when additional stock was
issued, the fact that proportionate control is diluted by a process
of merger seems not to be persuasive.6" Whether this is because
courts-today take a more realistic view and recognize pro rata con-
trol as not being worth very much, or because its loss is not a
sufficient consideration to over-balance the business interests in-
volved, does not appear; but few students of corporate problems
will quarrel with the conclusion.
Though by no means complete, the foregoing substantially sum-
marizes the position of courts in regard to the power to consum-
mate a merger. Save in Pennsylvania, where an archaic rule
requires that no merger be consummated unless the shareholder
is given an option to be paid out in cash,62 the equitable limitation
seems undisputed; and even under the Pennsylvania rule it would
appear that the courts involved were struggling for an automatic
right compensating the shareholder for his loss of position, much
as the Massachusetts court in Gray v. Portland Bank struggled
for such a right.

It is singular that no generalization has been attempted covering

equitable control over situations where statute and charter have

'59 I44 Fed. at 77I.

60 I24 App. Div. 262, io8 N. Y. Supp. 978 (I908).
61 Mayfield v. Alton Ry. Gas & Elec. Co., i98 Ill. 528, 65 N. E. I00 (1902).
62 Laumann v. Lebanon Valley R. R., 30 Pa. St. 42 (1858); Petry v. Harwood
Elec. Co., 280 Pa. I42, I24 Atl. 302 (I924).

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 CORPORATE POWERS AS POWERS IN TRUST I073

granted apparently clear powers to act. Yet such a generaliza-

tion is not difficult to find. By contract shareholders may dis-
tribute rights and participations inter sese. They may grant
to one of their number a senior preferred position and to another
a junior position; they may divide or limit rights in assets,
or the immediate participations in earnings as they agree. These
are individual agreements among themselves. But where powers
are conceded to the management or to any group to act for
the corporation as a whole, the obvious, if tacit, assumption is that
these powers are intended to be used only on behalf of all. They
are distinctly not intended to be granted for the purpose of bene-
fiting one set of participants as against another. To do so would
be to violate every intendment of the whole corporate situation.
While incidental variations in individual participations, or in
class participations may take place as the powers are used, the
powers themselves are designed to forward the ends of all,
not to forward the ends of some and defeat the ends of others.
In this respect, corporation law is substantially at the stage in
which equity was when it faced the situation of a trustee who had
been granted apparently absolute powers in his deed of trust. So
far as the law and the language went, the power was absolute; the
trustee could do as he pleased; could perhaps trade with himself
irrespective of his adverse interests; could, perhaps, sell the trust
assets at an unfairly low price. Yet to permit untrammeled ex-
ercise of these powers would be to violate the whole underlying
concept of the trust institution. It was possible to argue under the
old and rigid corporation laws that the statute had carefully laid
down the lines of corporate action, and that wherever a power was
not to be exercised, the statute had itself declined to grant the
ability to act. Modern statutes and charters admit no such in-
terpretation. The statute is in substance a permission to the
trustees to claim any powers they choose, within very few limits.
This very liberty negatives the assumption that the state through
its statute has undertaken to say that all powers, however exer-
cised, must be considered to be properly exercised. Courts, ac-
cordingly, have been substantially forced to the conclusion here
expressed: namely, that no power, however absolute in terms, is
absolute in fact; that every power is subject to the essential equi-
table limitations.

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 1074 HARVARD LAW REVIEW

In this concept, corporation law becomes in substance a branch

of the law of trusts. The rules of application are less rigorous,
since the business situation demands greater flexibility than the
trust situation. Probably the requirements as to motive and
clean-mindedness on the part of the persons exercising the powers
are substantially similar. The requirements of exactitude in ap-
portioning or assessing ratable differences must yield to the neces-
sary approximations which business entails. But the fundamental
requirements follow similar lines.
As a conclusion, it necessarily follows that:
First: Whenever a corporate power is exercised, its existence
must be ascertained and the technical correctness of its use must
be checked; but its use must also be judged in relation to the
existing facts with a view toward discovering whether under all
the circumstances the result fairly protects the interests of the
shareholders.
Second: Many of the apparently rigid rules protecting share-
holders, as, for example, the rule creating preemptive rights, are
in reality not " rights " but equitable remedies, to be used, molded,
or discarded as the equities of the case may require.
Third: New remedies may be worked out and applied by the
courts in each case, depending on the circumstances. For ex-
ample, to protect the rights of a non-cumulative preferred stock-
holder whose dividend should be withheld for business purposes
but should be retained for him for purposes of equitable treatment,
a court might require the declaration of the dividend in stock or
scrip. The powers of courts of equity in this regard are as broad
as may be necessary to adjust and maintain the relative participa-
tions of the various classes of shareholders.
Fourth: No form of words inserted in a corporate charter can
deny or defeat this fundamental equitable control. To do so
would be to defeat the very object and nature of the corporation
itself.
A. A. Berle, Jr.
NEW YORK CITY.

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